A Tale of Two Provinces:The Institutional Environment and Foreign Ownership in China Huang Yasheng and Di Wenhuab MIT Sloan School of Management School of Economic,Political and Policy Sciences,University of Texas at Dallas ABSTRACT In this paper,we use a unique dataset covering the joint ventures in Jiangsu and Zhejiang,two provinces of China,to test the effect of the institutional environment for domestic private firms on the ownership structures of FDI projects.Applying the prevailing bargaining framework in studying the ownership structures of FDI projects from the perspective of local firms seeking FDI,we find that the legal and financial constraints imposed on the more efficient domestic firms (i.e.private firms)to benefit the less efficient ones(i.e.TVEs)may have forced private firms to seek legal protection and financial resources in some ways-including forming alliances with foreign firms.Strong FDI preferences and/or weak capabilities may cause the private entreprises to make more equity concessions to foreign firms with whom they are to establish joint ventures.The more liberal the institutional environment for domestic private firms,the smaller the share of foreign investment in the joint ventures. 1 We thank the anonymous reviewer from China Finance Review for comments on an earlier version of this paper. Yasheng Huang 50 Memorial Drive,E52-562,Cambridge,MA,02142.Tel:+1 617253 9768;fax:+1617253 2660.Email addresses:yshuang @mit edu:wenhua.di@utdallas.edu 1
1 A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China1 Huang Yashenga* and Di Wenhua b a MIT Sloan School of Management b School of Economic, Political and Policy Sciences, University of Texas at Dallas ABSTRACT In this paper, we use a unique dataset covering the joint ventures in Jiangsu and Zhejiang, two provinces of China, to test the effect of the institutional environment for domestic private firms on the ownership structures of FDI projects. Applying the prevailing bargaining framework in studying the ownership structures of FDI projects from the perspective of local firms seeking FDI, we find that the legal and financial constraints imposed on the more efficient domestic firms (i.e. private firms) to benefit the less efficient ones (i.e. TVEs) may have forced private firms to seek legal protection and financial resources in some ways—including forming alliances with foreign firms. Strong FDI preferences and/or weak capabilities may cause the private entreprises to make more equity concessions to foreign firms with whom they are to establish joint ventures. The more liberal the institutional environment for domestic private firms, the smaller the share of foreign investment in the joint ventures. 1 We thank the anonymous reviewer from China Finance Review for comments on an earlier version of this paper. * Yasheng Huang: 50 Memorial Drive, E52-562, Cambridge, MA, 02142. Tel: +1 617 253 9768; fax: +1617 253 2660. Email addresses: yshuang@mit.edu; wenhua.di@utdallas.edu
A Tale of Two Provinces:The Institutional Environment and Foreign Ownership in China ABSTRACT In this paper,we use a unique dataset covering the joint ventures in Jiangsu and Zhejiang,two provinces of China,to test the effect of the institutional environment for domestic private firms on the ownership structures of FDI projects.Applying the prevailing bargaining framework in studying the ownership structures of FDI projects from the perspective of local firms seeking FDI,we find that the legal and financial constraints imposed on the more efficient domestic firms(i.e.private firms)to benefit the less efficient ones(i.e.TVEs)may have forced private firms to seek legal protection and financial resources in some ways-including forming alliances with foreign firms.Strong FDI preferences and/or weak capabilities may cause the private entreprises to make more equity concessions to foreign firms with whom they are to establish joint ventures.The more liberal the institutional environment for domestic private firms,the smaller the share of foreign investment in the joint ventures. JEL classification:F21;F23;C21;O53 Key words:China,FDI,private sector,institutional environment,joint venture 2
2 A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China ABSTRACT In this paper, we use a unique dataset covering the joint ventures in Jiangsu and Zhejiang, two provinces of China, to test the effect of the institutional environment for domestic private firms on the ownership structures of FDI projects. Applying the prevailing bargaining framework in studying the ownership structures of FDI projects from the perspective of local firms seeking FDI, we find that the legal and financial constraints imposed on the more efficient domestic firms (i.e. private firms) to benefit the less efficient ones (i.e. TVEs) may have forced private firms to seek legal protection and financial resources in some ways—including forming alliances with foreign firms. Strong FDI preferences and/or weak capabilities may cause the private entreprises to make more equity concessions to foreign firms with whom they are to establish joint ventures. The more liberal the institutional environment for domestic private firms, the smaller the share of foreign investment in the joint ventures. JEL classification: F21; F23; C21; O53 Key words: China, FDI, private sector, institutional environment, joint venture
1.Introduction Since 1979,foreign-invested enterprises(FIEs)-firms funded by FDI-have become a sizable player in Chinese economy.FIEs are making China a manufacturing base in Asia.They can be found in virtually every part of China and in every economic sector.FIEs have established dominant positions in a number of Chinese industries.The foreign trade activities of FIEs account for a significant share of China's overall trade.By 2002,they have accounted for over 50 percent of China's exports. A number of studies analyzing the determinants of the ownership structures of FIEs in China have been done by Pan(1996),Pan and Tse(1006),Pan et al.(1999)and others.Most of these studies approach the question from the perspective of the foreign-invested firms.They emphasize those variables in the regression specifications that are prominently featured in the theoretical and empirical studies of multinational corporations(MNCs),such as industrial characteristics,firm-specific assets,and technologies.The basic building block in on the studies of the determinants of equity structures of FDI firms is the industrial organization(IO) conceptualization.The starting point is that foreign firms will incur additional costs while domestic firms will not.The costs include the intrinsic difficulties of managing cross-border operations,and those of gathering information and developing expertise in relation to foreign markets and the political,social,and legal environments.To offset these extra costs,a foreign firm must have internal and ownership-specific advantages-such as R&D capabilities-over its domestic rivals.2 2 The pioneering work in this field of study is Hymer(1976).For a good summary of this large body of literature, see Caves(1996) 3
3 1. Introduction Since 1979, foreign-invested enterprises (FIEs)—firms funded by FDI—have become a sizable player in Chinese economy. FIEs are making China a manufacturing base in Asia. They can be found in virtually every part of China and in every economic sector. FIEs have established dominant positions in a number of Chinese industries. The foreign trade activities of FIEs account for a significant share of China's overall trade. By 2002, they have accounted for over 50 percent of China’s exports. A number of studies analyzing the determinants of the ownership structures of FIEs in China have been done by Pan (1996), Pan and Tse (1006), Pan et al. (1999) and others. Most of these studies approach the question from the perspective of the foreign-invested firms. They emphasize those variables in the regression specifications that are prominently featured in the theoretical and empirical studies of multinational corporations (MNCs), such as industrial characteristics, firm-specific assets, and technologies. The basic building block in on the studies of the determinants of equity structures of FDI firms is the industrial organization (IO) conceptualization. The starting point is that foreign firms will incur additional costs while domestic firms will not. The costs include the intrinsic difficulties of managing cross-border operations, and those of gathering information and developing expertise in relation to foreign markets and the political, social, and legal environments. To offset these extra costs, a foreign firm must have internal and ownership-specific advantages—such as R&D capabilities—over its domestic rivals.2 2 The pioneering work in this field of study is Hymer (1976). For a good summary of this large body of literature, see Caves (1996)
The studies which have yielded rich insights have their own limitations,one of which arises from the narrow range of host-country variables being used.Most often,these studies incorporate a measure of host-government policies on foreign ownership into their regressions. They mainly approach institutions as determinants of FDI flows rather than as determinants of equity structures.In this type of studies,the common control variables are market size,the export orientation of the economy,infrastructural quality,and political and economic stability.3 While it is natural and commonsensical to include foreign ownership policies in the studies of foreign ownership across countries,there is no need to do so in a study of FDI in China because in the 1990s the FDI policies of China were homogenously liberal. Another limitation related to the use of host-county variables is resulted from the negligence of the fact that FDI policies is just one of the many host-country variables that affect the ownership structures of FIEs.This can be judged by the inconsistent findings of the effect of FDI policies on FDI inflows in empirical studies.Some studies find the effect to be significant while others do not and even have results contrary to anticipation.There are countries which have liberalized the FDI regimes but fail to garner much FDI which others inundated with FDI despite their highly restrictive policies.Taiwan,for example,considerably liberalized its FDI regime in the late 1980s but its FDI/capital formation ratio remained virtually unchanged in the 1990s.India undertook substantial FDI liberalization in the 1990s but its FDI inflows were a fraction of the FDI inflows that went to China,which in fact is quite comparable to India by various FDI liberalization measures.4 3 See the survey by Lim(2001)for more about the findings. 4 Huang(2003)provides a number of such examples. 4
4 The studies which have yielded rich insights have their own limitations, one of which arises from the narrow range of host-country variables being used. Most often, these studies incorporate a measure of host-government policies on foreign ownership into their regressions. They mainly approach institutions as determinants of FDI flows rather than as determinants of equity structures. In this type of studies, the common control variables are market size, the export orientation of the economy, infrastructural quality, and political and economic stability.3 While it is natural and commonsensical to include foreign ownership policies in the studies of foreign ownership across countries, there is no need to do so in a study of FDI in China because in the 1990s the FDI policies of China were homogenously liberal. Another limitation related to the use of host-county variables is resulted from the negligence of the fact that FDI policies is just one of the many host-country variables that affect the ownership structures of FIEs. This can be judged by the inconsistent findings of the effect of FDI policies on FDI inflows in empirical studies. Some studies find the effect to be significant while others do not and even have results contrary to anticipation. There are countries which have liberalized the FDI regimes but fail to garner much FDI which others inundated with FDI despite their highly restrictive policies. Taiwan, for example, considerably liberalized its FDI regime in the late 1980s but its FDI/capital formation ratio remained virtually unchanged in the 1990s. India undertook substantial FDI liberalization in the 1990s but its FDI inflows were a fraction of the FDI inflows that went to China, which in fact is quite comparable to India by various FDI liberalization measures.4 3 See the survey by Lim (2001) for more about the findings. 4 Huang (2003) provides a number of such examples
Apart from FDI policies,another host-country variable frequently used is the "risk"of investing in a particular country.Again,including this variable in a study does make sense; however,the actual effect of political risk can be ambiguous.For example,researchers have theorized that political risks would reduce the incentives of a foreign firm to invest in a particular country and would in turn lead to a decrease of foreign ownership there.Nevertheless, the same political risks faced by foreign firms are also constraints on local firms of the host country.If these political risks pose threats to local firms more than to foreign firms,the latter may increase their ownership of assets in the country.The mechanism that works behind is likely to be that local firms are so constrained and are rendered uncompetitive and thus their assets can be acquired at a low price.> s Some of the existing researches have indeed provided empirical support for the idea that political risks can be associated with greater foreign ownership.For example,in one of the earliest studies that incorporated political risks,Contractor(1990)hypothesizes that lower political risks on the part of the host country should lead to majority equity holdings for US firms.But the regression results contradicted this hypothesis.Similarly,Asiedu and Esfahani(2001)find that better rule of law was in fact negatively correlated with the probability that a US firm would choose a wholly-owned subsidiary(as opposed to a joint venture).They argued that better rule of law may have promoted the productivity of FDI projects,and motivated the host government to seize rent from such projects. But they incorporated an explicit measure ofequity restrictions,which should have already captured the rent- capturing motivations. 5
5 Apart from FDI policies, another host-country variable frequently used is the “risk” of investing in a particular country. Again, including this variable in a study does make sense; however, the actual effect of political risk can be ambiguous. For example, researchers have theorized that political risks would reduce the incentives of a foreign firm to invest in a particular country and would in turn lead to a decrease of foreign ownership there. Nevertheless, the same political risks faced by foreign firms are also constraints on local firms of the host country. If these political risks pose threats to local firms more than to foreign firms, the latter may increase their ownership of assets in the country. The mechanism that works behind is likely to be that local firms are so constrained and are rendered uncompetitive and thus their assets can be acquired at a low price.5 5 Some of the existing researches have indeed provided empirical support for the idea that political risks can be associated with greater foreign ownership. For example, in one of the earliest studies that incorporated political risks, Contractor (1990) hypothesizes that lower political risks on the part of the host country should lead to majority equity holdings for US firms. But the regression results contradicted this hypothesis. Similarly, Asiedu and Esfahani (2001) find that better rule of law was in fact negatively correlated with the probability that a US firm would choose a wholly-owned subsidiary (as opposed to a joint venture). They argued that better rule of law may have promoted the productivity of FDI projects, and motivated the host government to seize rent from such projects. But they incorporated an explicit measure of equity restrictions, which should have already captured the rentcapturing motivations
This paper uses the prevailing approaches found in the literature examining the foreign ownership structure of FIEs in China with an emphasis of Chinese firms seeking to form alliances with foreign firms.6 Our interest revolves around the institutional environment for local firms and is premised on the idea that the relevant host-country factors for examining foreign ownership question go well beyond the traditional focus on FDI policies and political risks.Each FDI project requires contributions from both foreign and local firms.In view of analytical tractability,we have chosen firms-joint ventures-that have explicit contributions from local firms.?The prevailing approach in studies of ownership structure of FDI projects is to view the equity structures as an outcome of bargaining between foreign and host firms(or host governments).Bargaining,in turn, is treated as a function of the preferences for forming alliances and the capabilities to make resource contributions to the alliances on the parts of foreign and host firms.8 We adopt the same approach here,except for the fact that we pay closer attention to those factors that affect the preferences/capabilities of local firms. Approaching the foreign ownership question from a local perspective leads us naturally to a consideration of some of the institutional factors that have been featured prominently in the 6 It is explicitly acknowledged in previous studies that the capabilities and resources of local firms affect the ownership structures of FDI projects.For example,Asiedu and Esfahani(2001)incorporate several measures of local resource contributions.However,these variables are not critical in their conceptual framework. 7 This framework applies equally to wholly-owned foreign subsidiaries which do not have explicit contributions from local firms.We then want to determine the host-country factors that reduce the local contributions to zero. s The theoretical underpinning that links these industrial characteristics with bargaining power dynamics is the transaction cost framework.Theoretical literature includes Sveinar and Smith (1984),Hennart (1988)and Kogut (1988).For empirical applications,see Krobin(1987),Gomes-Casseres(1990)and Asiedu and Esfahani(2001). 6
6 This paper uses the prevailing approaches found in the literature examining the foreign ownership structure of FIEs in China with an emphasis of Chinese firms seeking to form alliances with foreign firms. 6 Our interest revolves around the institutional environment for local firms and is premised on the idea that the relevant host-country factors for examining foreign ownership question go well beyond the traditional focus on FDI policies and political risks. Each FDI project requires contributions from both foreign and local firms. In view of analytical tractability, we have chosen firms—joint ventures—that have explicit contributions from local firms.7 The prevailing approach in studies of ownership structure of FDI projects is to view the equity structures as an outcome of bargaining between foreign and host firms (or host governments). Bargaining, in turn, is treated as a function of the preferences for forming alliances and the capabilities to make resource contributions to the alliances on the parts of foreign and host firms. 8 We adopt the same approach here, except for the fact that we pay closer attention to those factors that affect the preferences/capabilities of local firms. Approaching the foreign ownership question from a local perspective leads us naturally to a consideration of some of the institutional factors that have been featured prominently in the 6 It is explicitly acknowledged in previous studies that the capabilities and resources of local firms affect the ownership structures of FDI projects. For example, Asiedu and Esfahani (2001) incorporate several measures of local resource contributions. However, these variables are not critical in their conceptual framework. 7 This framework applies equally to wholly-owned foreign subsidiaries which do not have explicit contributions from local firms. We then want to determine the host-country factors that reduce the local contributions to zero. 8 The theoretical underpinning that links these industrial characteristics with bargaining power dynamics is the transaction cost framework. Theoretical literature includes Svejnar and Smith (1984), Hennart (1988) and Kogut (1988). For empirical applications, see Krobin (1987), Gomes-Casseres (1990) and Asiedu and Esfahani (2001)
more recent studies of FDI flows but have so far not been extended to the analysis of ownership structure.Many of the institutional studies of FDI have focused on FDI flows rather than on foreign ownership of existing FDI projects.These two questions may be related to each other but are sufficiently distinct to warrant separate approaches.We believe that incorporating institutions into the analysis of foreign ownership is a contribution to the FDI literature We use a unique dataset containing over 2,000 joint ventures located in Jiangsu and Zhejaing to get at the two central questions in this paper.First,how do institutions affect the ownership structures of FDI projects?Second,how does one potential mechanism-the domestic firms as joint-venture partners-illuminate the institutional determinants of the ownership structures of FDI projects?Using the bargaining framework,we set out to test the hypothesis that an institutional environment more nurturing of domestic private firms is associated with greater bargaining power-arising from weaker FDI preferences or stronger capabilities-of Chinese joint-venture partners and,all else being equal,greater Chinese Note the underlying presumption in such an analysis.Our paper presumes that a country's institutional environment,first and foremost,affects the host firms anchored there and that the institutional environment affects the ownership structures of FDI projects via its primary effect on the capabilities and resource constraints of local firms. 1The most detailed institutional analysis is on the connections between corruption and FDI(Wheeler and Mody, 1992:Wei.2000:Hellman et al.,2002).. For example,one can envision a scenario in which foreign investors invest in many projects but only retain small equity interests in each project,and a contrasting scenario in which foreign investors invest in one single project but retain all the equity interests in it.The relationship between FDI flows and foreign ownership would differ between these two scenarios. 7
7 more recent studies of FDI flows but have so far not been extended to the analysis of ownership structure.9 Many of the institutional studies of FDI have focused on FDI flows rather than on foreign ownership of existing FDI projects. 10 These two questions may be related to each other but are sufficiently distinct to warrant separate approaches.11 We believe that incorporating institutions into the analysis of foreign ownership is a contribution to the FDI literature. We use a unique dataset containing over 2,000 joint ventures located in Jiangsu and Zhejaing to get at the two central questions in this paper. First, how do institutions affect the ownership structures of FDI projects? Second, how does one potential mechanism—the domestic firms as joint-venture partners—illuminate the institutional determinants of the ownership structures of FDI projects? Using the bargaining framework, we set out to test the hypothesis that an institutional environment more nurturing of domestic private firms is associated with greater bargaining power—arising from weaker FDI preferences or stronger capabilities—of Chinese joint-venture partners and, all else being equal, greater Chinese 9 Note the underlying presumption in such an analysis. Our paper presumes that a country’s institutional environment, first and foremost, affects the host firms anchored there and that the institutional environment affects the ownership structures of FDI projects via its primary effect on the capabilities and resource constraints of local firms. 10 The most detailed institutional analysis is on the connections between corruption and FDI (Wheeler and Mody, 1992; Wei, 2000; Hellman et al., 2002). . 11 For example, one can envision a scenario in which foreign investors invest in many projects but only retain small equity interests in each project, and a contrasting scenario in which foreign investors invest in one single project but retain all the equity interests in it. The relationship between FDI flows and foreign ownership would differ between these two scenarios
bargaining power may lead to a decrease of share of foreign ownership of production assets in joint ventures. We choose to focus on Jiangsu and Zhejiang for both methodological and substantive reasons.First,we impose some implicit restrictions on the supply side of FDI.After satisfying a number of our criteria,most of the surviving joint ventures in these two provinces turn out to be quite small.This characteristic,together with the availability of the detailed industrial classifications,reduces the variance of prominent FDI supply variables such as market positioning of firms,intangible assets,and R&D capabilities.Second,we ensure to maximize the variation on the demand side.These two provinces exhibit substantial-and well-documented- variation in the institutional environments for domestic private firms.This makes it easier for us to examine the institutional determinants of the ownership structures of FDI projects.During the studied period,the two provinces pursued very different policies towards domestic private sector, with Jiangsu imposing financials and legal constraints on domestic private firms and Zhejiang adopting a more supportive policy.The contrast between these two provinces has long been familiar to Chinese scholars (although far less to foreign scholars),but our paper is among the first to systematically explore the effect on FDI caused by the difference in their policies towards domestic private sector These two provinces make as ideal a natural experiment as one can find.Both provinces started out in the early 1980s with similar levels of economic and social development and with a similar domestic private sector size.Both are open to foreign trade and FDI and have a long history of entrepreneurship.Their geographic conditions are almost identical.Both are coastal provinces and are located next to each other.The substantial similarities between these two provinces in many respects and their well-documented policy differences furnish us with a 6
8 bargaining power may lead to a decrease of share of foreign ownership of production assets in joint ventures. We choose to focus on Jiangsu and Zhejiang for both methodological and substantive reasons. First, we impose some implicit restrictions on the supply side of FDI. After satisfying a number of our criteria, most of the surviving joint ventures in these two provinces turn out to be quite small. This characteristic, together with the availability of the detailed industrial classifications, reduces the variance of prominent FDI supply variables such as market positioning of firms, intangible assets, and R&D capabilities. Second, we ensure to maximize the variation on the demand side. These two provinces exhibit substantial—and well-documented— variation in the institutional environments for domestic private firms. This makes it easier for us to examine the institutional determinants of the ownership structures of FDI projects. During the studied period, the two provinces pursued very different policies towards domestic private sector, with Jiangsu imposing financials and legal constraints on domestic private firms and Zhejiang adopting a more supportive policy. The contrast between these two provinces has long been familiar to Chinese scholars (although far less to foreign scholars), but our paper is among the first to systematically explore the effect on FDI caused by the difference in their policies towards domestic private sector. These two provinces make as ideal a natural experiment as one can find. Both provinces started out in the early 1980s with similar levels of economic and social development and with a similar domestic private sector size. Both are open to foreign trade and FDI and have a long history of entrepreneurship. Their geographic conditions are almost identical. Both are coastal provinces and are located next to each other. The substantial similarities between these two provinces in many respects and their well-documented policy differences furnish us with a
solution to a nagging problem in research on this topic-how to precisely measure the institutional environment for domestic private firms. This paper is organized as follows.It begins by our tale of the two provinces to show how the institutional environment for private sector differs from each other.In the second section,we formulate four hypotheses about the institutional determinants of the equity structures of FDI projects.The third section explains the dataset and the construction of the variables and describes the findings from the statistical analysis.The last section is devoted to concluding remarks. 2.A tale of two provinces It is well recognised in the studies of Chinese economy that there is considerable institutional heterogeneity at the regional level in China.The Chinese reforms are often described as"federalism,Chinese style"following a prominent formulation of the Chinese reform model in which local governments are endowed with substantial discretion in economic decision making(Qian 1999).Our two provinces are good illustrations of"federalism,Chinese style".In the 1980s and up to the mid-1990s,Jiangsu imposed more stringent legal and financial constraints on private sector than Zhejiang did.This well-documented difference between the two provinces allows us to test the effect of the institutional environment on the ownership structures of foreign affiliates in China. 2.1.Profiles of Jiangsu and Zhejiang Table 1 presents some basic statistics about the two provinces.In terms of geographic location,both provinces are located on the eastern coast of China.Jiangsu is larger in terms of 9
9 solution to a nagging problem in research on this topic—how to precisely measure the institutional environment for domestic private firms. This paper is organized as follows. It begins by our tale of the two provinces to show how the institutional environment for private sector differs from each other. In the second section, we formulate four hypotheses about the institutional determinants of the equity structures of FDI projects. The third section explains the dataset and the construction of the variables and describes the findings from the statistical analysis. The last section is devoted to concluding remarks. 2. A tale of two provinces It is well recognised in the studies of Chinese economy that there is considerable institutional heterogeneity at the regional level in China. The Chinese reforms are often described as “federalism, Chinese style” following a prominent formulation of the Chinese reform model in which local governments are endowed with substantial discretion in economic decision making (Qian 1999). Our two provinces are good illustrations of “federalism, Chinese style”. In the 1980s and up to the mid-1990s, Jiangsu imposed more stringent legal and financial constraints on private sector than Zhejiang did. This well-documented difference between the two provinces allows us to test the effect of the institutional environment on the ownership structures of foreign affiliates in China. 2.1. Profiles of Jiangsu and Zhejiang Table 1 presents some basic statistics about the two provinces. In terms of geographic location, both provinces are located on the eastern coast of China. Jiangsu is larger in terms of
population,size of areas,and GDP.In 2001,Jiangsu had a population of 74 millions,compared with the 46 millions in Zhejiang.Jiangsu's GDP reached RMB 951.2 billions (approx.US$115 billions by then),compared with Zhejiang's RMB 674.5 billions(approx.US$81.3 billions). Both provinces are far more affluent than the rest of China.In 2001,the GDP per capita of the two provinces exceeded RMB 12,000,while the national average of GDP per capita stood at RMB7,543. As a whole,both provinces did quite well during the reform era,but Zhejiang,the initially poorer and less well endowed of the two,clearly had an outstanding performance During the reform,its progress of growth was faster and by 2001 it became richer than Jiangsu. Between 1978 and 1995,real GDP grew by 14 percent per annum in Zhejiang but only 12.9 percent in Jiangsu.In 2001,the per capita GDP of Jiangsu was RMB 12,922;that of Zhejiang RMB 14,655.The external sector of Zhejiang's economy also outperformed that of Jiangsu. Starting on a smaller share of foreign trade in GDP,Zhejiang grew much faster in export, averaging 27.9 percent annually between 1978 and 1995,compared with only 9.3 percent in Jiangsu.In 2001,the size of industry and foreign trade was almost identical in the two economies. [Insert Table 1 here] 2.2.Two contrasting development models One of the substantial differences between the two provinces is brought about by the status of domestic private sector development in China.In 1980,the size of the domestic private sector-non-state-owned sector minus collective firms,such as township and village enterprises 10
10 population, size of areas, and GDP. In 2001, Jiangsu had a population of 74 millions, compared with the 46 millions in Zhejiang. Jiangsu’s GDP reached RMB 951.2 billions (approx. US$ 115 billions by then), compared with Zhejiang’s RMB 674.5 billions (approx. US$ 81.3 billions). Both provinces are far more affluent than the rest of China. In 2001, the GDP per capita of the two provinces exceeded RMB 12,000, while the national average of GDP per capita stood at RMB 7,543. As a whole, both provinces did quite well during the reform era, but Zhejiang, the initially poorer and less well endowed of the two, clearly had an outstanding performance. During the reform, its progress of growth was faster and by 2001 it became richer than Jiangsu. Between 1978 and 1995, real GDP grew by 14 percent per annum in Zhejiang but only 12.9 percent in Jiangsu. In 2001, the per capita GDP of Jiangsu was RMB 12,922; that of Zhejiang RMB 14,655. The external sector of Zhejiang’s economy also outperformed that of Jiangsu. Starting on a smaller share of foreign trade in GDP, Zhejiang grew much faster in export, averaging 27.9 percent annually between 1978 and 1995, compared with only 9.3 percent in Jiangsu. In 2001, the size of industry and foreign trade was almost identical in the two economies. [Insert Table 1 here] 2.2. Two contrasting development models One of the substantial differences between the two provinces is brought about by the status of domestic private sector development in China. In 1980, the size of the domestic private sector—non-state-owned sector minus collective firms, such as township and village enterprises
